Hong Kong Traders Hedge Bets as Bitcoin’s Bear Market Increases Popularity of Derivatives Exchanges

Bitcoin‘s recent volatility seems to be fuelling the appeal of crypto-futures and derivative trading platforms, as traders look for new ways to leverage up their position in order to increase returns, The South China Morning Post reported on September 8.

Hong Kong a Gold Mine for Crypto-Futures Exchanges

Even though China is notorious for its stringent foreign policy and unpredictable stance on cryptocurrency, Hong Kong operates under a separate jurisdiction, which enables the city to maintain a rather neutral sentiment towards cryptocurrencies.

The Money Laundering and Terrorist Financing Risk Assessment Report released by Hong Kong Services and Treasury Department in April 2018 found risk in cryptocurrency to be “low”, effectively allowing cryptocurrency exchanges and brokers to operate without a license.

Perpetual Contracts

One such crypto-derivative exchange that has gained strong traction since its launch in 2014 is BitMEX, which claimed on July 26 it had traded a record 1 million bitcoin in 24 hours. BitMEX had moved its company headquarters to an entire floor of Cheung Kong Center, one of the city’s flagship office buildings, making it the most expensive workspace in Hong Kong.

Arthur Hayes, BitMEX co-founder and chief executive, says compared with the futures contracts offered by the US derivative exchanges, BitMEX perpetual contracts use bitcoin as collateral (in the form of initial and maintenance margins), rather than US dollars, adding that “BitMEX products have better liquidity than the CME and CBOE bitcoin products.”

According to The South China Morning Post, contracts from CME and CBOE appeal to institutional traders, while perpetual contracts from BitMEX can be used by traders who prefer to hold positions for the long term.

Another exchange, Bitfinex, allows traders to use up to 3.3 times leverage through its peer-to-peer margin trading services. The financing for such spot trading of cryptocurrencies is agreed upon and completed between two traders, and Bitfinex, which enforces the trades, is not a party to these financing contracts.

EMX, a hybrid exchange based in Silicon Valley, is currently building a derivative trading platform that offers futures contracts not only on bitcoin and ethereum but also traditional assets including equities, commodities and fiat currencies.

Jim Bai, the chief executive at EMX, told SCMP that the company is targeting a kick-off in Hong Kong by the end of this year, adding that they’re also working on getting fully licensed by the US Commodity Futures Trading Commission.

Increase in Trading Volume at Exchanges Might Bring About More Regulation

However, the increasing popularity of cryptocurrency futures contracts could bring about the end of unregulated trading in Hong Kong.

Hong Kong’s Securities and Futures Commission (SFC) issued a circular in December 2017 warning investors to be aware of such futures contracts, as it may be illegal for exchanges to offer these services without an appropriate SFC license or its authorization.

Gaven Cheong, a partner at law firm Simmons & Simmons, also told SCMP that this could prove to be troublesome for most of these exchanges, as they’re often registered in tax havens such as Seychelles, the British Virgin Islands or Bermuda.

“If you are ‘actively marketing’ your provision of a service from outside Hong Kong into Hong Kong, the service will also be deemed to have been carrying on a business that is a regulated activity in Hong Kong,” he said.

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